On Wed 26.10.2016, the Commissioner released Draft Practical Compliance Guideline PCG 2016/D16 relating to the meaning of ‘fixed entitlements’ in ‘fixed trusts’ as defined in the trust loss provisions.
This affects not only the requirements for a trust to carry forward losses but also a large number of provisions in income tax law, which are set out below in ‘Schedule A’.
A fixed trust’ is one where “persons have fixed entitlements to all of the income and capital of the trust” under s272-65 of Schedule 2F of the Income Tax Assessment Act 1936 (which relates to ‘Trust losses and other deductions’).
This, in turn requires an understanding of the definition of ‘fixed entitlements’ in s272-5 (of the same Schedule). The basic requirement (in ss(1)) is that the “beneficiary has a vested and indefeasible interest in a share of income of the trust that the trust derives from time to time, or of the capital of the trust”. Literally, this ought mean that a unitised entitlement to the income and capital of a trust is ‘vested and indefeasible’ interest – even if redeemed (so long as it is redeemed in accordance with the deed).
However, there are some provisions (in ss(2)) where interests are deemed to not be ‘defeasible’ but the detail in these provisions leaves practitioner’s nervous about taking the robust view just mentioned above.
Fortunately, this section also gives the Commissioner the power to treat entitlements in a trusted to be ‘fixed’ – when they would not be ‘fixed’ under the definition.
Because of this, it is a matter of some practical significance being able to get the Commissioner to exercise this power to get certainty into the structure or circumstance at hand. That is why the Commissioner has issued this draft ‘practical compliance guide’.
The ‘practical compliance guidance’ is given by way of a table of factors and examples, which is set out in its entirety in the related TT article flagged below.
The Draft does not apply for the purposes of the “non-arm’s length income” rules in s295-550 of the ITAA 1997 or the “special income” rules in the former s 273 of the ITAA 1936.
[ATO – PCG 2016/D16] [Related TT Article] [LTN 207, 26/10/16]
Schedule A – Income tax provisions which depend on the meaning of ‘fixed entitlement’ in s272-5 (of ITAA36, Schedule 2F)
| Income Tax Assessment Act 1936 | |
| Schedule 2F | Trust loss provisions |
| Section 102UC | Trustee beneficiary reporting |
| Sections 160APA; 160APHD | Franking of dividends |
| Income Tax Assessment Act 1997 | |
| Section 104-72 | Capital gains tax event E4 and trusts |
| Section 115-50 | Discount capital gains |
| Section 115-110 | Foreign or temporary residents – individuals with trust gains |
| Section 116-35 | Capital proceeds – market value substitution rule |
| Section 118-510 | Capital gains tax and venture capital |
| Section 124-781 | Capital gains tax and scrip-for-scrip rollover |
| Subdivision 165-F | Company tax losses – ownership of a company by non-fixed trusts |
| Section 170-265 | Company as a member of a linked group |
| Section 207-128 | Franked distributions – reinvestment choice |
| Section 415-20 | Designated infrastructure entity |
| Section 703-40 | Consolidation: treating entities held through non-fixed trusts as wholly-owned subsidiaries |
| Section 707-325 | Consolidation: modified market value of an entity becoming a member of a consolidated group |
| Section 713-50 | Consolidation: determining destination of distribution by non-fixed trust |
| Section 719-35 | Consolidation: treating entities held through non-fixed trusts as wholly owned subsidiaries |
| Section 725-65 | Direct value shifting: cause of the value shift |
| Section 727-110 | Indirect value shifting: common ownership nexus test |
| Sections 727-360; 727-365; 727-400; 727-410 | Indirect value shifting: control, common ownership and ultimate stake tests |
| Section 855-40 | Capital gains or losses of foreign residents |
| A New Tax System (Goods and Services Tax) Regulations 1999 | |
| Regulations 48-10.01 and 48-10.03A | Approval of GST groups |
| Schedule 1 to the Taxation Administration Act 1953 | |
| Section 45-287 | Trust income included in instalment income of a beneficiary |